With annual revenues of more than $32 billion, Microsoft Corporation is more than the largest software company in the world: it is a cultural phenomenon. The company's core business is based on developing, manufacturing, and licensing software products, including operating systems, server applications, business and consumer applications, and software development tools, as well as Internet software, technologies, and services. Led by Bill Gates, the world's wealthiest individual and most famous businessman, Microsoft has succeeded in placing at least one of its products on virtually every personal computer in the world, setting industry standards and defining markets in the process.

Origins of an Empire

Bill Gates was born in Seattle in 1955, the second of three children in a well-to-do family. His father, William H. Gates II, was a lawyer, while his mother, Mary Gates, was a teacher, a regent of the University of Washington, and member of several corporate boards. Gates was first exposed to computers at school in the late 1960s with his friend Paul Allen, the son of two Seattle librarians. By the time Gates was 14, the two friends were writing and testing computer programs for fun and profit.

In 1972 they established their first company, Traf-O-Data, which sold a rudimentary computer that recorded and analyzed traffic data. Allen went on to study computer science at the University of Washington and then dropped out to work at Honeywell, while Gates enrolled at Harvard. Inspired in 1975 by an issue of Popular Electronics that showed the new Altair microcomputer kit just released by MITS Computer, Gates and Allen wrote a version of BASIC for the machine. Later that year Gates left college to work full time developing programming languages for the Altair, and he and Allen relocated to Albuquerque, New Mexico, to be near MITS Computer, where Allen took a position as director of software development. Gates and Allen named their partnership Micro-soft. Their revenues for 1975 totaled $16,000.

A year later, Gates published "An Open Letter to Hobbyists" in the Altair newsletter, in which he enjoined users to avoid illegally copied software. Arguing that software piracy prevented "good software from being written," Gates wrote prophetically, "Nothing would please me more than being able to hire ten programmers and deluge the hobby market with good software." In November 1976 Allen left MITS to devote his full attention to Microsoft, and the company's tradename was registered. In 1977 Apple and Radio Shack licensed Microsoft BASIC for their Apple II and Tandy computers, with the Apple license going for a flat fee of $21,000. As Apple sold a million machines complete with BASIC, Microsoft's unit revenues dropped to two cents a copy.

That same year Microsoft released its second programming language, Microsoft FORTRAN, which was followed in 1978 by a version of COBOL. Both were written for the CP/M operating system, one of many available in the rapidly expanding but still unstandardized microcomputer market. As CP/M was adopted by computer manufacturers including Sirius, Zenith, and Sharp, Microsoft became the leading distributor for microcomputer languages. By the end of 1978 Microsoft had 13
employees, a sales subsidiary in Japan, and $1 million in revenues. The following year Gates and Allen moved the company to Bellevue, Washington.

The Early 1980s: Associations with IBM and Apple

Microsoft's big break came in 1980 as IBM began developing its Personal Computer, or PC. While IBM contracted Microsoft to develop languages for the PC, IBM's first choice to provide an operating system was the leader in the field, Digital Research; however, IBM and Digital Research were unable to agree on terms, so the contract for the operating system was awarded to Microsoft. As Microsoft was under a tight deadline and did not have an operating system of its own, the company purchased the rights to one from Seattle Computer Products for $75,000. Originally dubbed Q-DOS (for "Quick and Dirty Operating System"), the product was renamed MS-DOS (for "Microsoft Disk Operating System") and modified for IBM's purposes. Under the terms of the agreement, Microsoft retained the right to sell the operating system to other companies and to consumers, while IBM could not. Neither company could have foreseen the value of this arrangement: as other manufacturers developed hardware compatible with the IBM PC, and as personal computing became a multibillion-dollar business, the fast and powerful MS-DOS became the industry's leading operating system, and Microsoft's revenues skyrocketed.

The year 1980 also saw the arrival of Steve Ballmer, a close friend of Gates from Harvard, who was hired to organize the non-technical side of the business. Ballmer later recalled the company's stormy beginnings under Gates's leadership: "Our first major row came when I insisted it was time to hire 17 people. He claimed I was trying to bankrupt him." Conservative in his spending, Gates dictated that the company must always have enough money in the bank to operate for a year with no revenues. Nearly 20 years later that policy still stood—in 1999 Microsoft had cash reserves of more than $13 billion and no long-term debt—while Ballmer, who had by then become Microsoft president, remained Gates's closest friend and adviser.

In 1981 the company was incorporated as Microsoft, Inc., with Gates as president and chairman and Allen as executive vice-president. The company closed the year with 128 employees and revenues of $16 million. Two years later Allen left Microsoft after being diagnosed with Hodgkin's disease. He remained on the board of directors and continued to hold more than 10 percent of the company's stock. Also in 1983 Microsoft launched a word processing program, Word 1.0, in an effort to supplant the category leader, WordStar. Simpler to use and less expensive than WordStar, Word used a mouse to move the cursor and was able to display bold and italic type on the screen. Nevertheless, some users felt that the product was too complex—designed for software engineers rather than business users—and it was quickly surpassed in the market by WordPerfect, released by the Word-Perfect Corporation. Word did not become a success until its greatly improved version 3.0 was released in 1986, whereupon the application became Microsoft's best-selling product.

Throughout its history, Microsoft has been known for releasing products that were initially unsuccessful but eventually grew to dominate their categories. Many reviewers have been harsh in their criticism: David Kirkpatrick, writing in Fortune, described the first release of one product as a "typically unreliable, bug-ridden Microsoft mess," while Brent Schlender noted in the same magazine that "from its beginnings, Microsoft has been notorious for producing inelegant products that are frequently inferior and bringing them to the market way behind schedule." These critics note that the success of Microsoft has been based not only—or even principally—on the company's technological prowess, but also on Bill Gates's business acumen, which combined dogged perseverance, strategic marketing, powerful alliances, and, increasingly as the years went on, highly aggressive competitive tactics.

Microsoft worked closely with Apple during the development of Apple's Macintosh computer, which was introduced in 1984. Revolutionary in its design, the Mac featured a graphical user interface based on icons rather than the typed commands used by the IBM PC, making its programs simple to use and easy to learn, even by computer novices. Microsoft introduced Mac versions of BASIC, Word, and the spreadsheet program Multiplan, and quickly became the leading supplier of applications for the Mac. Revenues jumped from $50 million in 1983 to nearly $100 million in 1984.

Convinced that the Mac's graphical user interface represented the future of end-user applications, Gates sought to develop an interface manager to work on top of MS-DOS that would convert the operating system to a graphical model that would be user-friendly and provide a single method for interacting with the many non-standardized programs designed to run on the system. Because other companies, including IBM, were working to develop similar interface managers for MS-DOS, Gates solicited support from hardware manufacturers and software publishers who were concerned about IBM's continued dominance of the PC market. Compaq, Hewlett-Packard, Texas Instruments, Digital Equipment Corporation, and others announced their support for the project, called Microsoft Windows, while IBM, in the face of this opposition, threw its weight behind VisiOn, a similar product already being marketed by VisiCalc, while working to develop its own program, called TopView. Plagued by delays in development, the release of Windows was repeatedly rescheduled throughout 1984 and 1985, causing tensions at Microsoft and with other software publishers who were forced to delay releases of the applications they were designing for the system. Finally released in November 1985, after some 110,000 hours of frantic work by programmers, Windows faced a disappointing reception. The system was slow, few applications were available to run on it, and customers delayed purchase decisions while waiting for the introduction of TopView.

Company Perspectives:

To enable people and businesses throughout the world to realize their full potential.

In 1985 Microsoft also introduced Excel 1.0, a Mac spreadsheet product. Based on the earlier and less successful Multiplan, Excel gradually took hold against its principal competitor, Lotus 1-2-3, and eventually came to account for more than
$1 billion of Microsoft's annual revenues. That same year Microsoft began collaborating with IBM on a next-generation operating system, called OS/2.

The Late 1980s: Emergence of a Corporate Culture

In early 1986 Microsoft moved to a new 40-acre corporate campus in Redmond, Washington, near Seattle. Designed to provide a refuge free of distractions for those whose job was, in Gates's words, to "sit and think," the campus was nestled in a quiet woodland setting and reflected huge expenditures for tools, space, and comfort. Buildings were designed in the shape of an X to maximize light, with each programmer given a private office rather than a cubicle. The buildings featured many small, subsidized cafeterias, as well as refrigerators stocked with juice and caffeinated beverages. The self-contained, collegiate surroundings were carefully designed to promote the company's distinctive culture, which one commentator described as a close approximation of "math camp." Like most software companies, Microsoft had no dress code (although company lore recounts that in 1988 senior management did express a preference that employees not go barefoot indoors). Employees were hired on the basis of sheer intelligence, with the company selecting only a small fraction of applicants from the more than 100,000 resumes it received each year, and were expected to work brutal schedules to bring products to market as quickly as possible. Microsoft paid salaries that were distinctly lower than elsewhere in the industry, even to their senior executives, but compensated with generous stock options that made thousands of Microsoft employees millionaires. At the same time, the company tried to maintain a small company mentality, in which executives traveled coach class, the necessity of additional staff positions was closely scrutinized, and other unnecessary expenditures were vigilantly avoided.

In March 1986 Microsoft held an initial public offering (IPO) of 2.5 million shares which raised $61 million. Within a year the stock had risen from $25 to $85, making Bill Gates a billionaire at the age of 31. The following year Microsoft released its first CD-ROM product, Microsoft Bookshelf, a collection of ten reference works, as well as Excel for Windows, its first application for the new operating system. Microsoft also purchased Forethought, Inc., for $12 million, thereby acquiring that company's PowerPoint presentation graphics program, and released OS/2 in collaboration with IBM. In November 1987 Microsoft introduced Windows 2.0, a greatly improved version of the operating system, and by the end of the year Windows had sold more than one million copies. As Windows began to take hold, more software companies were convinced to develop applications for the operating system, which brought it increased usefulness and further sales momentum. In 1988 Microsoft surpassed Lotus Development Corporation as the leading software vendor, with more than $500 million in sales. The company was accused of copyright infringement by Apple, which alleged that Microsoft had copied the "look and feel" of the Macintosh, in a lawsuit that was finally dismissed after five years of litigation. In 1989 the company introduced Microsoft Office, a "suite" of programs that eventually came to dominate the market and become Microsoft's best-selling application product. While the initial release of Office was a discount package, later versions incorporated standard, shared features and included Word, Excel, PowerPoint, and the e-mail program Mail, with the Access database management program included in the Office Professional version.

Before 1990 Microsoft was primarily a supplier to hardware manufacturers, but after 1990 the bulk of the company's revenues came from sales to consumers. That year Microsoft became the first software company to reach $1 billion in revenues, closing the year with 5,600 employees.

Key Dates:

1975:

Microsoft is founded by Bill Gates and Paul Allen; they sell BASIC, the first PC computer language program to MITS Computer, Microsoft's first customer.

1981:

Microsoft, Inc. is incorporated; IBM uses Microsoft's 16-bit operating system for its first personal computer.

1982:

Microsoft, U.K., Ltd. is incorporated.

1983:

Paul Allen resigns as executive vice-president but remains on the board; Jon Shirley is made president of Microsoft (he later becomes CEO); Microsoft introduces the Microsoft Mouse and Word for MSDOS 1.00.

1985:

Microsoft and IBM forge a joint development agreement.

1986:

Microsoft stock goes public at $21 per share.

1987:

The company's first CD-ROM application, Microsoft Bookshelf, is released.

1990:

Jon Shirley retires as president and CEO; Michael R. Hallman is promoted in Shirley's place; the company becomes the first PC software firm to surpass $1 billion of sales in a single year.

1992:

Bill Gates is awarded the National Medal of Technology for Technological Achievement.

1993:

The company introduces Windows NT.

1995:

Bill Gates publishes his first book, The Road Ahead.

1996:

The company acquires Vermeer Technologies and its software application, FrontPage.

1997:

The Justice Department alleges that Microsoft violated a 1994 consent decree concerning licensing the Windows operating system to computer manufacturers.

1998:

The U.S. Department of Justice files two antitrust cases against Microsoft, alleging the company had violated the Sherman Act.

2000:

The company acquires Visio Corporation, its largest acquisition to date.

2001:

Microsoft Windows XP is released internationally.

2003:

Microsoft launches Windows Server 2003.

Product Development in the 1990s

In 1993 Microsoft introduced Encarta, the first multimedia encyclopedia on CD-ROM, as well as the first version of Windows NT, an operating system for users on corporate networks. While the initial acceptance of Windows NT was disappointing, an upgrade shipped in September of the following year as NT 3.5 was a dramatic success: winning the PC Magazine award
for technical excellence in system software and named the best operating system product of 1994, the upgrade boosted sales of NT to more than one million copies by the end of the year. Microsoft announced an agreement to purchase Intuit, the producer of the leading package of personal financial software, called Quicken; however, after the U.S. Department of Justice filed suit to prevent the takeover on the basis of antitrust concerns, Microsoft withdrew its offer. Revenues for 1994 exceeded $4 billion.

In August 1995 Microsoft launched its next version of Windows, called Windows 95, which sold more than one million copies in the first four days after its release. For the rest of the decade Microsoft expanded aggressively into new businesses associated with its core franchise. Its projects included two joint ventures with the National Broadcasting Company under the name MSNBC: an interactive online news service and a cable channel broadcasting news and information 24 hours a day. The company's web-based services included the Microsoft Network online service, a travel agency, local events listings, car buying information, a personal financial management site, and a joint venture with First Data that allowed consumers to pay their bills online. Microsoft purchased 11 percent of the cable television company Comcast for $1 billion and cut a licensing deal with the largest U.S. cable operator, TCI Communications, to put Windows into at least five million set-top boxes. The company also purchased WebTV, whose core technology allowed users to surf the Internet without a PC. Microsoft's latest generation of Windows, Windows CE, was designed to expand the franchise into computer-like devices including mobile phones, point-of-sale terminals, pocket organizers, digital televisions, digital cameras, handheld computers, automobile multimedia systems, and pagers. By early 1999 the company had secured more than 100 licensing agreements with manufacturers of these "intelligent appliances."

Legal Challenges and Competition in the Future

Microsoft's many critics believed that the company's goal in this widespread expansion was to control every delivery channel of information, thereby providing the means to control the content. According to Scott McNealy of rival company Sun Microsystems, "By owning the entry points to the Internet and electronic marketplace, Microsoft has the power to exercise predatory and exclusionary control over the very means for people to access the Internet and all it represents."

The U.S. government apparently agreed. After an intensive investigation of Microsoft's competitive practices that had gone on for much of the decade, in 1998 the U.S. Department of Justice and a group of 20 state attorneys general filed two antitrust cases against Microsoft alleging violations of the Sherman Act. The government sought to prove a broad pattern of anticompetitive behavior on Microsoft's part by demonstrating an array of claims, including the following: that Microsoft had a monopoly on the market for operating systems; that the company used that monopoly as a means of preventing other companies from selling its competitors' products (most notably Netscape's Internet browser); that it was illegal for Microsoft to bundle its own browser into the operating system Windows 98 as a means of precluding customers from purchasing Netscape's product; that the company sought to divide markets with competitors; that Microsoft sought to subvert the Java programming language, developed by Sun Microsystems, which it viewed as a threat to Windows; and, finally, that Microsoft's business practices were detrimental to consumers. The case was conducted under a flurry of media attention, with all parties agreeing that the stakes were extremely high: should Microsoft win, its brand of extremely aggressive capitalism would secure a legal blessing; should the company lose, the company could be forced to license the source code for Windows to competitors, thus destroying its monopoly, or could be broken up into smaller components, crippling its hold over the marketplace.

The fear and resentment that Microsoft and its founder Gates engendered were testament to the company's mythic status and Gates's role as the embodiment of the digital era. Gates's extreme wealth (in early 1999 he was worth $50 billion) made him the subject of constant scrutiny, while the Internet was rife with Bill Gates "hate pages," named, for example, "The Society for the Prevention of Bill Gates Getting Everything." Resentment and legal action notwithstanding, with more than $14 billion in sales in 1998, Microsoft showed no signs of slowing down.

Microsoft continued to grow rapidly, increasing its net revenue by 29 percent, to $19.7 billion, in 1999. Additionally, net income rose to $7.79 billion, a dramatic 73 percent increase over 1998. While the antitrust suit against Microsoft showed threats of a forced breakup of Microsoft, innovations in the company continued. Encarta Africana, the first complete encyclopedia of black history and culture, was launched, as well as Shop, Microsoft's first online store.

Unprecedented Growth in 2000 and Beyond

In 2000 Microsoft acquired Visio Corporation, the top supplier of business diagramming and technical drawing software. The transaction, at approximately $1.3 billion, became the largest acquisition in Microsoft history. Also in 2000, Microsoft invested $135 million in the software publisher Corel. Apparently, Corel negotiated the investment, offering to drop "certain legal actions" it had against the company, even as it had no legal claims filed against Microsoft. Another transaction—in Microsoft's desire to expand into the television market—involved a $56 million investment in Intertainer Inc, a provider of video-on-demand service. In the same year, Microsoft increased its employee base by nearly 9,000, from 39,170 to 48,030. The total expenditures took a temporary toll on Microsoft's net income, which dropped 22 percent, to $7.35 billion, in 2001. At the same time, net revenue continued to increase, up 10 percent from 2000.

The release of Windows 2000, while causing a stir, was overshadowed by the highly anticipated debut and worldwide release of Microsoft Windows XP. So confident was Microsoft in the product, and in its ability to boost worldwide sales of computers (which had declined 11.3 percent since the September 11 attacks just a month before), they launched a $250 million ad campaign for the product. The software did not represent a brand new development, as much of the technology came from that of its predecessor, Windows 2000. But as Paul Thurrott, writer for Network Windows magazine, wrote, "There's no doubt that we'll eventually look back on Windows XP as one of the key OS releases of all time."

Meanwhile, the Department of Justice ruled that they would not enforce a breakup of Microsoft. By the end of 2002, the U.S. District Court approved the settlement Microsoft reached with the Justice Department. The settlement included preventing Microsoft from benefiting from exclusive deals that could hinder competition; uniform contract terms for computer manufacturers; the required ability of customers to remove icons from certain Microsoft features; and a requirement that Microsoft release specific innovational technical information to its rivals, in order to enforce competition.

Microsoft's net revenue increased to $28.37 billion in 2002, while net income rebounded, gaining 6 percent from the previous year. In 2003, Microsoft saw an impressive 28 percent jump in net income, to reach just below $10 billion. The launching of Windows Server 2003, the largest software development project in the company's history to date, contributed to the growth. According to Microsoft, Windows Server 2003 would be a more reliable, more manageable, and more collaborative piece of software. Security would also be tighter, especially due to a newly built IIS (Internet Information Server) Web Server.

By 2004, with more than 56,000 employees and anticipated year-end revenues of up to $38 billion, Microsoft continued to hold a strong lead in the computer software industry. With an emphasis on continuous innovation—including such business products as the BizTalk Server 2004—further success seemed ensured. Still, resentment toward Microsoft was omnipresent. In April 2004, the company was fined by the European Union for abusing its monopoly on computer operating systems. The fine, at EUR 497 million ($596 million), was not likely to be the last for Microsoft.

With annual revenues of more than $14 billion, Microsoft Corporation is more than the largest software company in the world: it is a cultural phenomenon. The company’s core business is based on developing, manufacturing, and licensing software products, including operating systems, server applications, business and consumer applications, and software development tools, as well as Internet software, technologies, and services. Led by Bill Gates, the world’s wealthiest individual and most famous businessman, Microsoft has succeeded in placing at least one of its products on virtually every personal computer in the world, setting industry standards and defining markets in the process. The company is known as a ferocious competitor whose tactics have engendered the scrutiny of the Antitrust Division of the U.S. Department of Justice. It has been vilified by the press, its competitors, and many computer-savvy users who view its dominant position in the industry as a stranglehold that forestalls competition, stifles innovation, and leads to inferior products; at the same time, millions of users testify to the success of the company’s products, and respondents to survey after survey name Microsoft the most admired company in the United States.

Origins of an Empire

Bill Gates was born in Seattle in 1955, the second of three children in a well-to-do family. His father, William H. Gates II, was a lawyer, while his mother, Mary Gates, was a teacher, a regent of the University of Washington, and member of several corporate boards. Gates was first exposed to computers at school in the late 1960s with his friend Paul Allen, the son of two Seattle librarians. By the time Gates was 14, the two friends were writing and testing computer programs for fun and profit.

In 1972 they established their first company, Traf-O-Data, which sold a rudimentary computer that recorded and analyzed traffic data. Allen went on to study computer science at the University of Washington and then dropped out to work at Honeywell, while Gates enrolled at Harvard. Inspired in 1975 by an issue of Popular Electronics that showed the new Altair microcomputer kit just released by MITS Computer, Gates and Allen wrote a version of BASIC for the machine. Later that year Gates left college to work full time developing programming languages for the Altair, and he and Allen relocated to Albuquerque, New Mexico, to be near MITS Computer, where Allen took a position as Director of Software Development. Gates and Allen named their partnership Micro-soft. Their revenues for 1975 totaled $16,000.

A year later, Gates published “An Open Letter to Hobbyists” in the Altair newsletter, in which he enjoined users to avoid illegally copied software. Arguing that software piracy prevented “good software from being written,” Gates wrote prophetically, “Nothing would please me more than being able to hire ten programmers and deluge the hobby market with good software.” In November 1976 Allen left MITS to devote his full attention to Microsoft, and the company’s tradename was registered. In 1977 Apple and Radio Shack licensed Microsoft BASIC for their Apple II and Tandy computers, with the Apple license going for a flat fee of $21,000. As Apple sold a million machines complete with BASIC, Microsoft’s unit revenues dropped to two cents a copy.

That same year Microsoft released its second programming language, Microsoft FORTRAN, which was followed in 1978
by a version of COBOL. Both were written for the CP/M operating system, one of many available in the rapidly expanding but still unstandardized microcomputer market, and as CP/M was adopted by computer manufacturers including Sirius, Zenith, and Sharp, Microsoft became the leading distributor for microcomputer languages. By the end of 1978 Microsoft had 13 employees, a sales subsidiary in Japan, and $1 million in revenues. The following year Gates and Allen moved the company to Bellevue, Washington.

The Early 1980s: Associations with IBM and Apple

Microsoft’s big break came in 1980 as IBM began developing its Personal Computer, or PC. While IBM contracted Microsoft to develop languages for the PC, IBM’s first choice to provide an operating system was the leader in the field, Digital Research; however, IBM and Digital Research were unable to agree on terms, so the contract for the operating system was awarded to Microsoft. As Microsoft was under a tight deadline and did not have an operating system of its own, the company purchased the rights to one from Seattle Computer Products for $75,000. Originally dubbed Q-DOS (for “Quick and Dirty Operating System”), the product was renamed MS-DOS (for “Microsoft Disk Operating System”) and modified for IBM’s purposes. Under the terms of the agreement, Microsoft retained the right to sell the operating system to other companies and to consumers, while IBM could not. Neither company could have foreseen the value of this arrangement: as other manufacturers developed hardware compatible with the IBM PC, and as personal computing became a multibillion dollar business, the fast and powerful MS-DOS became the industry’s leading operating system, and Microsoft’s revenues skyrocketed.

1980 also saw the arrival of Steve Ballmer, a close friend of Gates’s from Harvard, who was hired to organize the nontechnical side of the business. Ballmer later recalled the company’s stormy beginnings under Gates’s leadership: “Our first major row came when I insisted it was time to hire 17 people. He claimed I was trying to bankrupt him.” Conservative in his spending, Gates dictated that the company must always have enough money in the bank to operate for a year with no revenues. Nearly 20 years later that policy still stood—in 1999 Microsoft had cash reserves of more than $13 billion and no long-term debt—while Ballmer, who had by then become Microsoft president, remained Gates’s closest friend and advisor.

In 1981 the company was incorporated as Microsoft, Inc., with Gates as president and chairman and Allen as executive vice-president. The company closed the year with 128 employees and revenues of $16 million. Two years later Allen left Microsoft after being diagnosed with Hodgkin’s disease. He remained on the board of directors and continued to hold more than ten percent of the company’s stock. Also in 1983 Microsoft launched a word processing program, Word 1.0, in an effort to supplant the category leader, WordStar. Simpler to use and less expensive than WordStar, Word used a mouse to move the cursor and was able to display bold and italic type on the screen. Nevertheless, some users felt that the product was too complex—designed for software engineers rather than business users—and it was quickly surpassed in the market by WordPerfect, released by the WordPefect Corporation. Word did not become a success until its greatly improved version 3.0 was released in 1986, whereupon the application became Microsoft’s best-selling product.

Throughout its history, Microsoft has been known for releasing products that were initially unsuccessful but eventually grew to dominate their categories. Many reviewers have been harsh in their criticism: David Kirkpatrick, writing in Fortune, described the first release of one product as a “typically unreliable, bug-ridden Microsoft mess,” while Brent Schlender noted in the same magazine that “from its beginnings, Microsoft has been notorious for producing inelegant products that are frequently inferior and bringing them to the market way behind schedule.” These critics note that the success of Microsoft has been based not only—or even principally—on the company’s technological prowess, but also on Bill Gates’s business acumen, which combined dogged perseverance, strategic marketing, powerful alliances, and, increasingly as the years went on, highly aggressive competitive tactics.

Microsoft worked closely with Apple during the development of Apple’s Macintosh computer, which was introduced in 1984. Revolutionary in its design, the Mac featured a graphical user interface based on icons rather than the typed commands used by the IBM PC, making its programs simple to use and easy to learn, even by computer novices. Microsoft introduced Mac versions of BASIC, Word, and the spreadsheet program Multiplan, and quickly became the leading supplier of applications for the Mac. Revenues jumped from $50 million in 1983 to nearly $100 million in 1984.

Company Perspectives:

At Microsoft we believe people shape the face of computing today and tomorrow. The critical forces in the personal computing and digital technology revolutions are the developers who define the technologies and the customers who use these technologies every day. Microsoft’s commitment to making innovative software products, combined with a sincere appreciation for customer feedback, is the key to our customers’ satisfaction and the company’s long-term success. Microsoft’s long-term vision of the personal computer as a tool to empower people and organizations to great things drives its development efforts as the next era of personal computing and communications technology approaches.

Convinced that the Mac’s graphical user interface represented the future of end-user applications, Gates sought to develop an interface manager to work on top of MS-DOS that would convert the operating system to a graphical model that would be user-friendly and provide a single method for interacting with the many non-standardized programs designed to run on the system. Because other companies, including IBM, were working to develop similar interface managers for MS-DOS, Gates solicited support from hardware manufacturers and software publishers who were concerned about IBM’s continued dominance of the PC market. Compaq, Hewlett-Packard, Texas Instruments, Digital Equipment Corporation, and others announced their support for the project, called Microsoft Windows,
while IBM, in the face of this opposition, threw its weight behind VisiOn, a similar product already being marketed by VisiCalc, while working to develop its own program, called TopView. Plagued by delays in development, the release of Windows was repeatedly rescheduled throughout 1984 and 1985, causing tensions at Microsoft and with other software publishers who were forced to delay releases of the applications they were designing for the system. Finally released in November 1985, after some 110,000 hours of frantic work by programmers, Windows faced a disappointing reception. The system was slow, few applications were available to run on it, and customers delayed purchase decisions while waiting for the introduction of TopView.

In 1985 Microsoft also introduced Excel 1.0, a Mac spreadsheet product. Based on the earlier and less successful Multiplan, Excel gradually took hold against its principal competitor, Lotus 1-2-3, and eventually came to account for more than $1 billion of Microsoft’s annual revenues. That same year Microsoft began collaborating with IBM on a next-generation operating system, called OS/2.

The Late 1980s: A Corporate Culture Emerges

In early 1986 Microsoft moved to a new 40-acre corporate campus in Redmond, Washington, near Seattle. Designed to provide a refuge free of distractions for those whose job was, in Gates’s words, to “sit and think,” the campus was nestled in a quiet woodland setting and reflected huge expenditures for tools, space, and comfort. Buildings were designed in the shape of an X to maximize light, with each programmer given a private office rather than a cubicle. The buildings featured many small, subsidized cafeterias, as well as refrigerators stocked with juice and caffeinated beverages. The self-contained, collegiate surroundings were carefully designed to promote the company’s distinctive culture, which one commentator described as a close approximation of “math camp.” Like most software companies, Microsoft had no dress code (although company lore recounts that in 1988 senior management did express a preference that employees not go barefoot indoors). Employees were hired on the basis of sheer intelligence, with the company selecting only a small fraction of applicants from the more than 100,000 resumes it received each year, and were expected to work brutal schedules to bring products to market as quickly as possible. Microsoft paid salaries that were distinctly lower than elsewhere in the industry, even to their senior executives, but compensated with generous stock options that have made thousands of Microsoft employees millionaires. At the same time, the company tried to maintain a small company mentality, in which executives traveled coach class, the necessity of additional staff positions was closely scrutinized, and other unnecessary expenditures were vigilantly avoided.

In March 1986 Microsoft went public with an initial public offering (IPO) of 2.5 million shares that raised $61 million. Within a year the stock had risen from $25 to $85, making Bill Gates a billionaire at the age of 31. The following year Microsoft released its first CD-ROM product, Microsoft Bookshelf, a collection often reference works, as well as Excel for Windows, its first application for the new operating system. Microsoft also purchased Forethought, Inc., for $12 million, thereby acquiring that company’s PowerPoint presentation graphics program, and released OS/2 in collaboration with IBM. In November 1987 Microsoft introduced Windows 2.0, a greatly improved version of the operating system, and by the end of the year Windows had sold more than one million copies. As Windows began to take hold, more software companies were convinced to develop applications for the operating system, which brought it increased usefulness and further sales momentum. In 1988 Microsoft surpassed Lotus Development Corporation as the leading software vendor, with more than $500 million in sales. The company was accused of copyright infringement by Apple, which alleged that Microsoft had copied the “look and feel” of the Macintosh, in a lawsuit that was finally dismissed after five years of litigation. In 1989 the company introduced Microsoft Office, a “suite” of programs that eventually came to dominate the market and become Microsoft’s best-selling application product. While the initial release of Office was a discount package, later versions incorporated standard, shared features and included Word, Excel, PowerPoint, and the e-mail program Mail, with the Access database management program included in the Office Professional version.

Before 1990 Microsoft was primarily a supplier to hardware manufacturers, but after 1990 the bulk of the company’s revenues came from sales to consumers. That year Microsoft became the first software company to reach $1 billion in revenues, closing the year with 5,600 employees.

Product Development in the 1990s

In 1993 Microsoft introduced Encarta, the first multimedia encyclopedia on CD-ROM, as well as the first version of Windows NT, an operating system for users on corporate networks. While the initial acceptance of Windows NT was disappointing, an upgrade shipped in September of the following year as NT 3.5 was a dramatic success: winning the PC Magazine award for technical excellence in system software and named the best operating system product of 1994, the upgrade boosted sales of NT to more than one million copies by the end of the year. Microsoft announced an agreement to purchase Intuit, the producer of the leading package of personal financial software, called Quicken; however, after the U.S. Department of Justice filed suit to prevent the takeover on the basis of antitrust concerns, Microsoft withdrew its offer. Revenues for 1994 exceeded $4 billion.

In August 1995 Microsoft launched its next version of Windows, called Windows 95, which sold more than one million copies in the first four days after its release. For the rest of the decade Microsoft expanded aggressively into new businesses associated with its core franchise. Its projects included two joint ventures with the National Broadcasting Company under the name MSNBC: an interactive online news service and a cable channel broadcasting news and information 24 hours a day. The company’s Web-based services included the Microsoft Network online service, a travel agency, local events listings, car buying information, a personal financial management site, and a joint venture with First Data that allows consumers to pay their bills online. Microsoft purchased 11 percent of the cable television company Comcast for $1 billion and cut a licensing deal with the largest U.S. cable operator, TCI Communications, to put Windows into at least five million set-top boxes. The company also purchased WebTV, whose core technology allows
users to surf the Internet without a PC. Microsoft’s latest generation of Windows, Windows CE, was designed to expand the franchise into computer-like devices including mobile phones, point-of-sale terminals, pocket organizers, digital televisions, digital cameras, hand-held computers, automobile multimedia systems, and pagers. By early 1999 the company had secured more than 100 licensing agreements with manufacturers of these “intelligent appliances.”

Legal Challenges and Competition in the Future

Microsoft’s many critics believed that the company’s goal in this widespread expansion was to control every delivery channel of information, thereby providing the means to control the content. According to Scott McNealy of rival company Sun Microsystems, “By owning the entry points to the Internet and electronic marketplace, Microsoft has the power to exercise predatory and exclusionary control over the very means for people to access the Internet and all it represents.”

The U.S. government apparently agreed. After an intensive investigation of Microsoft’s competitive practices that had gone on for much of the decade, in 1998 the U.S. Department of Justice and a group of 20 state Attorney Generals filed two antitrust cases against Microsoft alleging violations of the Sherman Act. The government sought to prove a broad pattern of anticompetitive behavior on Microsoft’s part by demonstrating an array of claims, including the following: that Microsoft had a monopoly on the market for operating systems; that the company used that monopoly as a means of preventing other companies from selling its competitors’ products (most notably Netscape’s Internet browser); that it was illegal for Microsoft to bundle its own browser into the operating system Windows 98 as a means of precluding customers from purchasing Netscape’s product; that the company sought to divide markets with competitors; that Microsoft sought to subvert the Java programming language, developed by Sun Microsystems, which it viewed as a threat to Windows; and, finally, that Microsoft’s business practices were detrimental to consumers. The case was conducted under a flurry of media attention, with all parties agreeing that the stakes were extremely high: should Microsoft win, its brand of extremely aggressive capitalism would secure a legal blessing; should the company lose, the company could be forced to license the source code for Windows to competitors, thus destroying its monopoly, or could be broken up into smaller components, crippling its hold over the marketplace. A decision was expected in the summer of 1999.

The fear and resentment that Microsoft and its founder Gates have engendered are testament to the company’s mythic status and Gates’s role as the embodiment of the digital era. Gates’s extreme wealth (in early 1999 he was worth $50 billion) makes him the subject of constant scrutiny, while the Internet is rife with Bill Gates “hate pages,” named, for example, “The Society for the Prevention of Bill Gates Getting Everything.” Resentment and legal action notwithstanding, with more than $14 billion in sales in 1998 and $3 billion planned for R&D expenditures in 1999, Microsoft shows no signs of slowing down. The company remains a force whose products have come to seem indispensable to millions of users worldwide, and David Kirk-patrick’s 1998 Fortune article, “Microsoft: Is Your Company Its Next Meal?” is just the smallest indicator that competitors still have no room to relax.

Microsoft Corporation

Microsoft, the world’s largest designer of software languages and applications for personal computers, was started in 1975 by William Gates and Paul Allen as a vehicle for developing microcomputer operating systems—languages which control basic functions, including how data enters and leaves a computer’s memory. The name Microsoft was created from a contraction of the words “microcomputer” and “software.” Gates, then 19, and Allen, 21, were putting the finishing touches on their first language, Microsoft BASIC, designed for the first inexpensive microcomputer, the MITS Altair. Gates soon followed-up Microsoft BASIC with a disk-managing program called DiskBASIC.

Gates and Allen were both math and programming prodigies who had spent most of their spare time since their early teens playing with computers and writing programming codes. Gates, who was studying law at Harvard, made certain that the contract Microsoft signed with MITS allowed the hardware developer to use and market the software, but retained ownership of the language for Microsoft—a relationship between software designers and those using their products which became the model for future software licensing agreements and is still widely used.

Gates felt that microcomputers would eventually become immensely popular, and in hopes of Microsoft becoming the biggest supplier of software for the industry, he diligently helped convince corporations of the nascent microcomputer industry’s viability. As a result, some of Microsoft’s first orders were from Fortune 500 firms like General Electric. As his business expanded and new microprocessors entered the market, Gates began hiring other programmers to help carry the load. By the end of 1976 he had four programmers working under him and Microsoft had opened an office in Albuquerque, New Mexico, where MITS was located. Gates dropped out of Harvard to devote full attention to his company.

In 1977 the Apple II was unveiled and Radio Shack stores had begun selling Tandy computers; both Apple and Tandy bought licenses for a version of BASIC. Microsoft’s sales reached $500,000, despite the firm’s involvement in a lawsuit. When ownership of MITS changed hands in 1977, the new owners claimed that MITS owned the rights to Microsoft’s BASIC. Microsoft won the case, but the firm’s BASIC fees were held during the suit, causing temporary cash flow problems. In the meantime the Tandy and Apple machines were selling much more quickly than previous microcomputers had sold. Other manufacturers, including Atari and Commodore, entered the booming microcomputer market.

To help preserve cash flow, Microsoft released FORTRAN and COBOL programming languages in July of 1977 and June of 1978, respectively. These two languages were written for the control program for microcomputer, or CP/M operating system, one of many available in the then unstandardized microcomputer market. Fortunately for Microsoft, a number of firms, including Sirius, Zenith and Sharp, chose CP/M as the operating system for their new computers. As a result, Microsoft became the leading distributor for microcomputer languages.

When larger firms like Texas Instruments began entering the microcomputer field, they also decided to use Microsoft’s languages. In 1978 Microsoft formed a Japanese subsidiary and began sales in Japan. By the end of the year the company had 13 employees and had racked up sales of $1 million. In January of 1979, Microsoft moved to Bellevue, Washington, near Seattle, where Gates and Allen had grown up.

Microcomputer technology was growing rapidly. Intel released a 16-bit chip, the 8086, in late 1978; Microsoft finished developing BASIC for the new chip the following June. The 16-bit chip could handle far more memory than the previous 8-bit chip, meaning that microcomputers could perform more sophisticated tasks. By the end of 1979 Microsoft had a contract to develop FORTRAN for the 8086 chip, and had created a retail sales division for consumers. The firm now had 25 employees and $2.5 million in sales; Microsoft BASIC had sold about 1 million copies worldwide.

In the meantime Apple II, which used a microprocessor and operating system incompatible with CP/M applications, had become the top-selling computer. Microsoft seized an opportunity by developing a card that enabled the Apple II to use CP/M and Microsoft BASIC. The SoftCard sold 25,000 copies the first year, and introduced Microsoft to the rapidly growing base of Apple customers. Application software, particularly for Apple computers, sold quickly enough that Microsoft decided to expand into the software market.

International Business Machines Corporation (IBM), by far the biggest computer maker in the world, noticed the rapid growth of the microcomputer market and was determined to gain entry. IBM decided to follow Apple’s strategy of encouraging other companies to develop necessary software, and eventually selected Microsoft to devise an operating language for the IBM microcomputer. On November 6, 1980, IBM and Microsoft signed a contract specifying that Microsoft would supply IBM with four languages and an operating system. The deal was a major coup for tiny Microsoft and its 25-year-old cofounder Gates.

To please the security-conscious IBM, the Microsoft Disk Operating System, or MS-DOS—one of the most important products in computer history— was developed in a small windowless room. Because IBM insisted on a tight time frame, Microsoft bought an operating system from Seattle Computer Products. The system still required modifications, however, and Microsoft struggled to stay on schedule. IBM announced its microcomputer, now known as the personal computer, or PC, on August 12, 1981.

MS-DOS Version 1.0 took up 12K (kilobytes) of memory, a fair-sized program at the time, but minuscule compared to software sizes just a few years later. Microsoft also released languages for the IBM computer and two applications: a typing program and a game. Because DOS was modeled after the CP/M operating system, software for CP/M computers could be quickly rewritten for DOS.

For two years after the release of the IBM personal computer MS-DOS and CP/M battled for domination of the microcomputer market. The easy adaptability of CP/M programs for DOS, coupled with IBM’s enormous prestige, helped MS-DOS gradually pull ahead. While MS-DOS sold for much less than CP/M, the final blow was probably the release of Lotus 1-2-3 in 1983, a spreadsheet program that only ran on DOS. By 1983 most large computer manufacturers, with the important exception of Apple, had decided to offer computers that were compatible with IBM standards—which meant they used MS-DOS as their operating system. Partly because IBM’s entry had changed the image of microcomputers from toy to serious business tool, the PC market was growing exponentially: in 1980, 300,000 people owned microcomputers; three years later nearly 10 times that number did. As a result of this explosive growth, 500,000 copies of MS-DOS had been sold by the end of 1983, carrying Microsoft’s annual sales to $69 million.

As soon as the massive task for IBM was completed, Microsoft focused upon application software, releasing Multiplan, an electronic spreadsheet designed to compete with VisiCalc—the best-selling software package at that time. Multiplan was introduced with the biggest advertising campaign Microsoft had used to that date, and initial reviews were encouraging. Microsoft began developing programs that could run on IBMs, Apples, and CP/M computers with a minimum of modifications. However, soon after the release of Multiplan, Lotus released the heavily advertised 1-2-3, which promptly ran away with the spreadsheet market, replacing VisiCalc as the world’s first choice in software. Lotus’s product was designed for computers with 256K of memory, while Microsoft’s program only functioned on 64K IBM machines, and therefore, had limited capabilities. Multiplan had sigificant success in Europe, though, which prompted Microsoft to establish subsidiaries in England, France, and West Germany by the end of 1983.

In July of 1981 the firm, formerly a partnership between Gates and Allen, was reorganized as a privately held corporation. In November of 1981, Microsoft moved to Bellevue, Washington. The following July, while Gates remained chairman and CEO, James C. Towne was named president. However, Gates dismissed him 11 months later and named Jon Shirley, a former Tandy vice-president, as Towne’s replacement. Allen had left due to health problems, and Shirley’s presence freed Gates to concentrate on long term strategies.

By the end of 1982, 50 microcomputer manufacturers were licensed to use MS-DOS, and Microsoft had 200 employees. The firm was nearly doubling in size every year, and had not yet adapted to being a large company. Gates, whose volatile temperament was well known in the computer industry, had exacerbated Microsoft’s chaos by abruptly changing product specifications and moving developers around. Shirley quickly professionalized the company’s financial management, inventory, and accounting, which had been in disarray.

Back in the marketplace, word processing software was dominated by WordStar, which had sold more than 1 million copies despite requiring users to learn numerous complicated commands. Gates sensed the need for a more user-friendly word program. Microsoft Word, released in April of 1983, used a mouse to move the cursor around and choose comands and was able to display boldface, italics, and other typefaces on the computer screen. In addition, Microsoft Word was designed to work with laser printers— capable of producing near-typeset quality documents. The program, priced at $375, was cheaper than WordStar. As further persuasion for WordStar users, Microsoft Word could read WordStar files and convert them to Microsoft Word format. Microsoft pushed the new program heavily with an advertising campaign and the distribution of demonstration copies.

Reviews of the program were divided, with many full of praise; but some analysts claimed Microsoft Word was difficult to learn, seemingly aimed more at software engineers than consumers. WordPerfect Corporation had released a powerful but user-friendly, self-named package which indeed proved “perfect” for a market of consumers still wary of computers. Sales of Microsoft Word, hampered by WordPerfect, were mediocre in the United States, though the product did relatively well in Europe.

Microsoft had often been criticized for first releases that were too hard to learn and not quite up to speed, but Gates always pressed on, doing market research and strengthening weak points. Microsoft Word finally became popular with the release of Word 3.0 in April of 1986, which included an online tutorial. The new version became Microsoft’s best-seller, but even so, could not surpass the sales of WordPerfect.

Apple released the revolutionary, and immensely popular, Macintosh personal computer in January of 1984. The Macintosh, or Mac, was designed with user-friendliness as the primary consideration. In contrast to IBM PCs, which used letters and numbers to communicate, the Mac had a graphical user interface which communicated with users via small pictures, or icons; users pointed at icons with a mouse and clicked to perform tasks. Gates had talked with Apple executives during the creation of the Macintosh and was very impressed. He believed the graphical user interface was the future of computing.

The Macintosh came with its own word processing program, MacWrite. Microsoft was slated to release a version of Word for the Macintosh, but suffered repeated delays; the package was not released until January of 1985. Word for the Macintosh could read MacWrite files, but retained some problems common to DOS. By the time Word 3.0 for the Macintosh was released, two years later, Macintosh users were tired of the limitations of MacWrite, still the only word processing program for the Macintosh. Sales of Word for the Macintosh immediately took off and Microsoft was
soon selling 20,000 copies each month at $395 per copy. By the time WordPerfect released a version for the Macintosh, Word had captured the Macintosh word processing market.

By this point Microsoft had annual sales of $590 million and employed 2,800 people. This meteoric growth was not simply due to the popularity of Word and DOS; rather, Microsoft had released a number of other products, including another spreadsheet program. Microsoft had reworked Multiplan, stressing quicker calculations, graphing, and the ability to link spreadsheets; the package was renamed Excel. Because Lotus 1-2-3 had become the IBM standard, Microsoft decided to switch development of the new spreadsheet to the Macintosh. Lotus was developing an integrated program for the Macintosh called Jazz that also included a spreadsheet. Gates stuck to developing an advanced spreadsheet, believing integrated programs were a compromise. Microsoft worried that Jazz might steal the Macintosh market and advertised heavily, but Jazz—slow and lacking key features—flopped. By early 1986 Excel dominated the Macintosh spreadsheet market.

Microsoft continued to derive about half its profits from sales of the Disk Operating System, but with the advent of Word and Excel, Microsoft became the biggest producer and supplier of software for the Macintosh. The prevalence of Macintosh systems—1.25 million Macintoshes had been sold by the end of 1987—convinced Microsoft that strength lay in graphical user interfaces; the firm had in fact been developing a program to convert MS-DOS computers to graphical user interfaces for several years. The challenge was made more difficult because each program designed for MS-DOS used unique commands—no one had imposed uniformity on MS-DOS the way Apple had on Macintosh developers.

The interface had to have a top layer of graphics, bring uniformity to all potentially running applications, and straighten out problems caused by various printers and monitors. Gates also wanted Macintosh-style pull-down menus and the ability to display several documents simultaneously. The conversion was a formidable project, and other companies, including IBM, were working on interface managers for DOS. In one of the earliest multi-company alliances within the computer industry, Gates met with the manufacturers of IBM-compatibles who did not want IBM to continue monopolizing the development of PC standards. He convinced many of them that the development of Microsoft’s interface, called Windows, would free them from IBM’s control of the PC environment. Compac, Hewlett-Packard, Texas Instruments, Digital Equipment Corporation, and others announced their support for Windows. Microsoft also rounded up support from fellow software publishers, including rival Lotus.

As a result of this mass collusion, IBM decided to support VisiCorp’s graphic interface, known as VisiOn, which had already been released. IBM further distanced itself from Microsoft by marketing a UNIX language from another software publisher. Windows kept falling more and more behind schedule, but VisiOn also ran into trouble, as did IBM’s own program, TopView.

Already nearly a year behind, Microsoft rescheduled the release of Windows from October of 1984 to June of 1985. The delay forced other publishers to delay their Windows applications, and hurt the company’s image. Tensions built within Microsoft over the delays. Over 30 programmers, testers, and documentation writers worked frantically on Windows, some of them virtually living in the office. The first version of Windows finally hit the market in November of 1985, having taken about 110,000 programming hours to write. Sales were disappointing, however. Windows took up five floppy disks, which made the system quite slow; furthermore, very few programs could run on Windows. Potential buyers were also waiting to see if IBM’s TopView would be a better product.

To entice consumers, Microsoft opted to develop software for the interface. In addition, Microsoft convinced IBM to have Microsoft adapt Windows to the next IBM operating system, OS/2, which Microsoft was helping write.

During 1985 the flourishing Microsoft decided to build a campus in Redmond, Washington, complete with a tree-filled park in hopes that the relaxed setting would be conducive to the exacting task of writing software codes than a traditional office complex. Microsoft began transferring operations to Redmond the next year.

Following the genesis of Windows and Excel for the Macintosh, Gates decided to take Microsoft public. In early 1986 Microsoft was owned almost entirely by its employees, with Gates and Allen (who had founded another software company, Asymetrix) owning controlling majorities. The initial offering was about 12 percent of the company, in the form of about 2.5 million shares. The stock rose from $25.75 when introduced in March of 1986 to $84.75 in March of 1987, making Gates a billionaire at age 31.

Microsoft’s primary competitor, Lotus, had introduced 1-2-3 to Japan in late 1986; 1-2-3 rapidly eroded sales of Microsoft’s Multiplan, Excel’s predecessor. Microsoft retaliated by choosing Excel—originally earmarked for the IBM market as a challenge to Lotus 1-2-3 and already tremendously successful for Macintosh—to be the primary Windows product. Excel was introduced for $495, the same price as 1-2-3. To lure Lotus users, Microsoft not only made Excel capable of reading and writing 1-2-3 files, but also gave Excel the ability to write files for the new generation of more powerful computers using the 80286 and 80386 microprocessors. Microsoft hoped this transition to more powerful computers would help Excel crack the 1-2-3 market. Microsoft was right. The PC version of Excel received glowing reviews. Some big computer stores used Excel to help push higher-end hardware. By the first quarter of 1986, the rival companies were in a virtual tie, with Lotus earning $65.6 million in sales and Microsoft garnering $66.8 million.

Windows 2.0 was released at about the same time as Excel, in November of 1987. Twice as fast as its predecessor, version 2.0 had an interface similar to the Macintosh interface. The PC version of Excel was designed to exploit Windows’s strengths, which gave Windows additional credibility and further appealed to Macintosh users. By December, Windows had sold 1 million copies, and software companies that had previously developed products only for the Macintosh began working on Windows software. Worried that Windows’s unique graphic interface was losing exclusiveness, Apple sued Microsoft for copyright infringement in March of 1988, alleging that Microsoft had copied “the look and feel” of the Macintosh. Apple also claimed that Microsoft had violated a 1985 licensing agreement between the two companies. Apple asked for Microsoft to either pay royalties or take Windows off the market.

The suit was gradually whittled down by the court, which over the course of a year removed all but 10 of the 189 items that Apple claimed were copyright violations. The court also agreed to Microsoft’s request to consider the case on a function-by-function basis, as opposed to an overall analysis of look and feel.

In the meantime, Microsoft was gradually wearing down some Lotus 1-2-3 loyalists with advertising campaigns, including one that offered 1-2-3 users Excel for $75 if they sent in their old Lotus disks. Lotus contributed to the loss of its own base by repeatedly delaying the release of 1-2-3 version 3. However, when version 3 was finally released in June of 1989, some critics judged the software better than Excel. Excel had found a niche in the IBM market, but was not as popular as 1-2-3.

Even so, Microsoft’s sales reached $803.5 million for 1989, and the corporation maintained approximately 4,000 employees. Surging PC sales throughout the world were contributing to the firm’s growth, since Microsoft was making money on every operating system of all IBM-compatible computers purchased. Microsoft also had a large share of the European software market, including nearly one-third of the French market. Windows was an important factor— having sold 2 million copies by early 1989—especially because other developers had climbed on the bandwagon and released software designed to work with Windows.

Microsoft had become a huge player in the computer world, but success bred enemies. Relations between IBM and Microsoft reached the breaking point over Microsoft’s support for the Windows/DOS combination rather than the new version of OS/2 operating system favored by IBM. Microsoft poured time and money into Windows 3.0, and spent about $10 million on initial promotions. One of the selling points of OS/2 was the ability to run several applications at once; Windows 3.0 also stressed this capability, and IBM was not pleased that many users, including businesses, seemed to prefer Windows to OS/2. Apple was also displeased over this new graphic interface, and in April of 1991 broadened the pending lawsuit to include Windows 3.0.

By that point Windows 3.0 had sold more than 1 million copies, despite complaints that the system required advanced hardware to run at an acceptable speed, and contentions that Apple’s System 7 was a superior graphic interface. By late 1990 the relationship between IBM and Microsoft had greatly deteriorated, with IBM taking most of the responsibility for development of the second version of OS/2. IBM wanted Microsoft to focus on OS/2; Microsoft refused. Microsoft had initially been enthusiastic about OS/2 as a way to replace the aging DOS system, which was now on version 4. But Windows 3.0 was selling extremely well, while sales of OS/2 were lagging. The two former collaborators engaged in a price war that had Microsoft selling DOS 5.0 at deep discounts and IBM halving the price of OS/2.

Finally, in a move that took the computer industry by surprise, arch-rivals IBM and Apple, whose lawsuit against Microsoft was still unsettled, announced an alliance to create a new operating system that would make computers easier to use and allow their two systems to swap information. The alliance, announced in July of 1991, was widely seen as an attempt to outflank Microsoft, whose emerging control of software and operating system standards threatened both manufacturers.

Microsoft also attempted to get into the rapidly growing desktop-publishing market by producing the software that controls laser printers, but could not crack Adobe Systems hold on the market and was forced to withdraw. Microsoft did release a layout program called Microsoft Publisher in February of 1992, though the offering encountered tough competition against established programs like Aldus PageMaker and QuarkXpress.

Gates pushed Microsoft to work on pen-based computers, expected by some analysts to account for a significant percentage of the computer market by the mid-1990s. Microsoft was one of the first firms to explore compact disc, read only memory (CD-ROM) technology as well. The corporation had burgeoned into network software—which allows many computers to be linked together simultaneously and has been utilized chiefly in business offices—by embarking on a venture with Ashton-Tate to market data-base file servers in 1988. Challengers in that area included Novell Inc. and Lotus. Microsoft had a hand in so many pieces of the PC pie, that the Federal Trade Commission (FTC) began investigating possible anti-competitive practices by the company.

In addition to completing a merger with Fox Software on June 29, 1992, Microsoft saw its management undergo several changes in the 1990s. Jon Shirley resigned after six years as president in 1990. He was replaced by Michael Hallman, who formerly headed Boeing’s computer division. However, Gates forced Hallman out after one year, and split his office between Michael Maples, Steven A. Ballmer, and Francis J. Gaudette.

Microsoft was not only the largest software firm in the early 1990s, but also the most diversified. As the computer world continued evolving rapidly, Microsoft was well positioned to maintain status as foremost software manufacturer due to constant shifts into important emerging areas like multi-media. However, the alliances against the firm were potentially daunting, particularly the Apple-IBM venture, which was geared towards developing a new operating system to challenge DOS.

Microsoft Corporation

Microsoft Corporation

Many companies make personal computers, but just one business—Microsoft Corporation—dominates the development of the software that runs on those machines. Microsoft built its success on its operating systems, the programs that control a computer's different functions and act as the "middlemen" between the machine's hardware and software. From there, the company began producing its own software programs, then expanded into the Internet and other forms of communication.

Along with success, Microsoft earned a reputation for ruthlessly trying to control the computer market. The quest for domination reflected the drive of the company's cofounder and leader, Bill Gates. Intelligent and impatient, Gates's success with Microsoft made him the richest person in the world. Gates and his company, however, have drawn loud criticism for their practices and faced several lawsuits.

In December 1974, Paul Allen and Bill Gates, two longtime friends from Seattle, Washington, read about a new computer
that came in a kit, called the Altair 8800. The Altair was one of the first microcomputers—what are now called personal computers, or PCs. Gates later wrote in his 1995 book The Road Ahead, "Paul and I didn't know exactly how [the Altair] would be used, but we were sure it would change us and the world of computing."

Allen and Gates had already worked with BASIC, a simple programming language created in 1964. The two friends decided to create a version of BASIC that would run on the Altair, which used a new microprocessor built by Intel. (A microprocessor, or chip, is a collection of transistors and other tiny electrical parts that act as the "brain" of any personal computer.) Allen and Gates contacted MITS, the Albuquerque, New Mexico, company that made the Altair. They told MITS they had already developed a form of BASIC to run on the new computer. When MITS expressed interest in the product, Allen and Gates had to actually create the language they claimed already existed.

At the time, Gates was a sophomore at Harvard University. Allen, almost three years older, was working in Boston for Honeywell. They worked around the clock to create the new BASIC language, which MITS bought. In July 1975, Gates and Allen officially formed MicroSoft (later dropping the hyphen), which stood for "microcomputer software." It was the first company specifically founded to design software for personal computers.

By early 1977, the company had four other programmers. At first, Microsoft's only customer was MITS. Soon, however, other companies began building computers that used the Intel microprocessor. Allen and Gates designed new versions of BASIC to sell to these companies. Microsoft earned a royalty,
or fee, for every computer sold with BASIC installed. In 1978, Microsoft's sales reached more than $1 million. The company had a deal to sell its products in Japan, and this provided about half of that revenue.

MS-DOS and IBM

As Microsoft grew, Gates asked a friend from college, Steve Ballmer, to help run the business. Ballmer insisted the company needed more employees. Gates resisted at first, but finally relented, telling Ballmer to "keep hiring smart people as fast as you can, and I will tell you when you get ahead of what we can afford." Since Microsoft grew so quickly, Ballmer never had to stop hiring.

Timeline

1975:

Bill Gates and Paul Allen form Microsoft to develop software for personal computers.

1978:

Microsoft opens its first international sales office, in Japan.

1981:

IBM sells the first personal computer using the Microsoft Disk Operating System (MS-DOS).

1983:

Allen resigns from Microsoft.

1985:

Microsoft introduces its first version of the Windows operating system.

1987:

Microsoft Bookshelf is the company's first product on CD-ROM.

1990:

Microsoft becomes the first software company to reach annual sales of $1 billion.

1995:

The MSN on-line service begins operation.

1996:

NBC and Microsoft begin broadcasting on the MSNBC cable network.

1998:

The U.S. Justice Department accuses of Microsoft of violating antitrust laws; three years later, the company reaches a settlement with the federal government but still faces a lawsuit from nine states.

2001:

Microsoft enters the video game industry with the Xbox video console.

By the time Ballmer joined Microsoft, the company had moved to Bellevue, Washington, just outside Seattle. Sales at the
company were doubling each year, as more people saw the value of microcomputers, and more companies selling the computers used Microsoft BASIC. In the summer of 1980, International Business Machines (IBM), the world's leader in large mainframe computers, decided to enter the market for small, desktop computers. IBM turned to Microsoft for its programming languages and another company, Digital Research, for an operating system.

When its deal with Digital Research fell through, IBM asked Microsoft to provide an operating system. Microsoft agreed, even though it had never designed one before. Working with a tight schedule, Microsoft bought a system from a local developer, then devoted about one-third of its staff to improving it. By the summer of 1981, Microsoft had a new product: MS-DOS, which stood for Microsoft Disk Operating System.

IBM called its microcomputer the PC, for personal computer. Soon other computer companies began selling personal computers that were compatible with IBM's and used the MS-DOS operating system. Although customers could also choose another operating system, MS-DOS was cheaper, and some software companies sold programs that only ran on it. A poll taken in 1984 showed that about 80 percent of PC owners used MS-DOS. By then, Microsoft was also designing its own software for the IBM machines. Its first word processing program, Word for MS-DOS 1.0, appeared in September 1983; the company also had a popular game, Flight Simulator.

From the beginning, Microsoft employees worked long hours, and Gates sometimes slept on the floor of his office. The demanding schedule continued even as Microsoft grew. In 1984, Gates told Fortune, "You have to be in good physical condition to work here." Microsoft programmers were known to spend long stretches in their office, eating only junk food and never seeing the sun.

Windows on the Computing World

In 1983, Apple Computer, Inc. (see entry) introduced Lisa, a computer that featured a graphical user interface (GUI). GUI used images to represent software programs. Instead of typing in commands to open a program, users moved a mouse to point at and click on an icon, or picture, that represented the program. Microsoft was already working on its own GUI
operating system, which it called Windows. The company officially announced the development of Windows in November 1983, after Apple had already demonstrated the power of GUI.

Microsoft, however, needed two more years to finish Windows, a delay that shook the company's reputation. When Windows finally appeared, it ran slowly, and few companies offered software that could run with it. Eventually, however, after several improvements, Windows became the standard operating system for PCs. By 1989, Microsoft sold more than two million copies.

While developing Windows, Microsoft continued to offer new software programs. It worked with Apple to create software for the Macintosh, the highly successful machine released after the Lisa. In 1985, Microsoft introduced the spreadsheet Excel. A spreadsheet is a program that calculates relations between numbers; businesses typically use it to track credits (amounts taken in) and debits (amounts owed). Lotus dominated the spreadsheet market with its 1-2-3, but Excel for Macintosh, and later Windows, became the top spreadsheet program.

The year 1985 also saw Microsoft move to its newly-built headquarters, a large campus-style complex in Redmond, Washington. In 1986, Microsoft offered shares to the public for the first time, raising $61 million for the company. Over time, Allen and Gates's stock holdings made them billionaires. Many Microsoft employees became millionaires because of the shares they owned.

Trying to Take a Bite out of Apple

Although Microsoft and Apple Computer, Inc. sometimes worked together, the two companies had their difficulties. In 1988, Apple sued Microsoft, claiming it had borrowed the "look and feel" of its operating system for Windows. Microsoft won the case, but to many Apple users, Bill Gates and company remained the enemy. Given those feelings, the computer world was stunned in 1997 when Apple cofounder Steve Jobs (see Apple entry) announced a new deal between his company and Microsoft. Gates decided to buy a small share of Apple, giving the computer company $150 million.

In 1987, Microsoft introduced its first product on CD-ROM, Microsoft Bookshelf. The disc contained ten different reference tools. Two years later, the company began selling Office, a combination of several software programs—called a "suite"—geared to businesses. These programs were often bundled, or sold with new computers, but Microsoft also focused on selling individual software programs through retail stores.

New Fields to Conquer

In 1990, Microsoft's new version of Windows, 3.0, generated fast sales, with as many as thirty thousand copies sold every week. That same year, Microsoft became the world's first software company with annual sales over $1 billion. The company continued to improve its existing products and develop new ones. With the expansion of the Internet, Microsoft introduced a browser, Internet Explorer (IE), which came packaged with Windows. Through the 1990s, Microsoft continued this strategy of adding software to Windows. Since almost all PCs came with Windows, consumers ended up with the other Microsoft software as well.

In 1995, Microsoft took a larger role in the Internet when it launched the Microsoft Network (MSN). It was designed to compete with America Online (see AOL Time Warner entry), the largest network offering e-mail, special features, and access to the Internet. MSN enrolled more than five hundred thousand customers in just a few months and had eight million users by
2002. The desire for faster access to the Internet led to the development of cable modems, which used cable TV systems to transport digital information. Microsoft entered this field in 1997 when it bought a share of cable company Comcast for $1 billion.

Another Internet/television marriage came in 1997, when Microsoft bought WebTV for $425 million. The company offered Internet access through a special device attached to a television and phone line. Most consumers, however, preferred to access the Internet through computers. As a result, WebTV was one of Microsoft's less successful purchases.

Legal Battles

In a 1997 survey, Americans named Microsoft the most respected company in America. And thanks to the PC explosion, Microsoft's products were used in millions of homes and offices every day. But within the computer industry, the company and its chairman, Bill Gates, were not so well loved. Microsoft was accused of using unfair practices to squash competitors. Gates, however, said Microsoft was not doing anything unethical. He told Business Week in 1993, "Our success is based on one thing: good products."

Disorder in the Court

During the first Microsoft antitrust trial, Bill Gates did not testify in person for his company. Instead, he appeared on videotape, answering questions at a deposition, a legal hearing conducted outside of a courtroom. Gates seemed stiff on the tape, and his decision not to appear in court struck some people as arrogant. The judge at the trial, Thomas Penfield Jackson, later compared Gates to the former self-proclaimed emperor of France, Napoleon Bonaparte (1769-1821).

When attorney generals from nine states and the District of Columbia reintroduced the lawsuit in 2002, Gates did take the stand. According to a report in the Los Angeles Times, he testified that the states' request would "cripple Microsoft as a technology company."

The same year, however, the U.S. Justice Department took over an investigation of Microsoft's marketing practices. This followed an earlier inquiry by the Federal Trade Commission (FTC) into possible illegal dealings between the company and IBM. In 1994, Microsoft agreed to end some of the practices the government said restricted competition, but the agreement was not officially settled until August 1995. In the meantime, the Justice Department filed suit to stop Microsoft's purchase of Intuit, maker of Quicken, a popular financial program.

In November 1997, the Justice Department filed another suit against Microsoft. The company was charged with illegally forcing computer makers to offer Internet Explorer in order to receive Windows 95 for their machines. The battle over IE mushroomed the next year when the U.S. Justice Department and the attorney generals of twenty states accused the company of violating antitrust laws. These laws are meant to keep one company from having a monopoly, or sole control of prices and products, in any one industry. The antitrust case dragged on until 2001, when at one point a federal judge ruled that Microsoft should be split in two.

The Justice Department, however, said it did not want to take that action and called for a quick settlement of the case. Microsoft was not forced to break up, but it did face stiff penalties for its marketing methods. Several state attorney generals did not accept the outcome and pursued the antitrust lawsuit into 2002.

Still on Top, Still Growing

Despite its legal problems, Microsoft continued to grow and dominate the software industry. In 2000, Gates gave himself a new title—chief software architect—while Steve Ballmer took over as CEO and president. The company explored new ways of connecting computer users and sharing data through a new project called. NET. And, starting in December 2000, Microsoft went on a buying spree, paying more than $1 billion apiece for three smaller software firms. The company also entered the video game market in 2001 with its Xbox console, designed to compete with such major video-game manufacturers as Sony and Nintendo.

Microsoft continued to irritate some consumers and computer experts by introducing new products that needed constant updates to work properly and ensure security. By 2002, the Internet featured hundreds of Web sites attacking Microsoft, its products, and Gates. But revenues that year were more than $27 billion, and the company had more than $38 billion in cash available for investments and research. Microsoft's influence on the lives of computer users was in no danger of weakening.

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Microsoft

The spread of computerization in the late twentieth century ushered in a new, third, industrial revolution, which redefined the environment and relationships of industrial capitalism. The computer hardware and software industries have been among the most dynamic and rapidly developing of any industries. The origins of the microcomputer industry are typically acknowledged as dating to 1975 with the release of the MITS/Altair in specialist hobby magazine Popular Electronics. It was for this computer that William (Bill) Gates, while still a student at Harvard, succeeded in writing an operating system (Langlois and Robertson 1985). Formed in 1975 by Gates and Paul Allen, with Steve Ballmer joining later, Microsoft Corporation became the world’s largest computer operating system and software company. Annual turnover increased from $140 million in 1985 to over $2.7 billion by 1992 and more than $44 billion by 2006. Pretax revenue as a percentage of turnover was 37 percent in 2006 (Microsoft 2006). By the early 1990s, the firm had gained a dominant position in the market for computer software with 44 percent of sales (Wallace and Erickson 1992). The U.S. Department of Justice, however, brought an antitrust case in October 1998, arguing that Microsoft had succeeded in achieving a monopolistic position in the supply of computer operating systems with a market share of over 90 percent of Intel-based PC (personal computer) operating systems (U.S. Department of Justice 1999).

The culture and organization of the company was synonymous with informality and openness to top management, despite its being an organization of over 76,000 employees. From the beginning, casual dress, group working, and a lack of hierarchy were its trademarks. The corporation’s offices in Redmond, Washington, are arranged in a campus style, imitating a university where staff would feel a sense of familiarity and “belonging.” The company actively sought to recruit bright and ambitious programmers and graduates from leading universities. This flat managerial structure and openness is, however, only one side of the coin. Microsoft employees were expected to work extremely long hours. Strong pressure existed to ensure employees were focused solely on the work they did for the company. More draconically, the company used a biannual peer review process whose result was the sacking of the worst performing 5 percent of staff in each review.

Gates’s entrepreneurship, often discussed in Schumpeterian terms, highlights the importance of social networks and social capital. Born in Seattle in 1955 into a wealthy family with a father who was a successful lawyer, Gates attended Lakeside School, a prestigious private school, and later Harvard University with the aim of becoming a lawyer like his father. Gates was thus not simply an exceedingly bright student, he was also well connected. He was able, through his father, to gain contacts with leading lawyers and raise capital through venture capitalists.

Microsoft released its first disk operating system, called Microsoft Disk Operating System (MS-DOS), in 1981. The decision of IBM to adopt MS-DOS as its operating system for preinstallation on IBM computers proved crucial in allowing Microsoft to establish MS-DOS as the industry standard. MS-DOS was not the most technologically advanced product available in the early 1980s. Icon-based interfaces (using a graphical user interface), developed at the Xerox research labs and adopted by Apple Computer, Inc., were not matched by Microsoft until the release of Microsoft Windows in 1985. However, the superiority of the icon-based system encouraged Apple to maintain close proprietorial control over its operating system, resulting in the Apple operating system being only available on Apple Mac machines. Unlike Apple, Microsoft saw in licensing a commercial mechanism for the establishment of an industry standard, as well as a strategy and competitive advantage based upon the creation of positive externalities and the networking effects deriving from the establishment of an industry standard (Langlois and Robertson 1985, pp. 68–101). Thus the licensing and success of Microsoft Windows was such that by 1990 Microsoft had achieved a dominant position in the supply of operating systems running on Intel-based PCs.

Microsoft also found competitive advantage in closely monitoring and responding to new developments in the software industry. As a result, however, Microsoft has been continually accused—as with the antitrust case described above and in a lawsuit brought by Apple in 1988—of anti-competitive practices, copying and even stealing new developments. Microsoft developed close contacts with small innovative firms, only to release alternative versions of the small firms’ software. Intuit, a producer of a money-management software package, claimed that after its software began outselling rivals by six to one, Microsoft approached the company in early 1990 to discuss a possible takeover or joint venture whereby Microsoft would produce the software, licensing the Intuit brand name. However, by the end of 1990, Microsoft had abandoned all negotiations and announced the release of its own finance product, Microsoft Money.

Microsoft’s practice of licensing software, and increasing the price to manufacturers for older versions of Microsoft software and operating systems, has been effective at encouraging the spread of the newest versions of its software, thereby reinforcing its market position. Microsoft’s success brought it into conflict with the antitrust authorities in both the United States and Europe, where its monopoly power was subject to extensive government investigation. In the European case, Microsoft was fined €280.5 million in 1996, with another €497 million levied in 2004. European authorities also restricted Microsoft’s ability to bundle software (Tran 2006).

As of 2007, the company is organized into three divisions—Microsoft Platforms and Services, Microsoft Business, and Microsoft Entertainment and Devices— reflecting the evolution of the company from its initial development of operating systems and software toward the provision of Internet, media, and entertainment services. By 2007 Microsoft had expanded its operations into ninety countries. However, this expansion has brought new regulatory problems, notably the Chinese government’s demands that the company restrict access to Internet services and news. Thus Microsoft’s expansion worldwide and into new markets is, almost uniquely, inherently interlinked with regulatory and competitive interaction between the company and host governments.

Microsoft Corporation

Computer Sciences
COPYRIGHT 2002 The Gale Group Inc.

Microsoft Corporation

Microsoft Corporation, a software company, was started by Bill Gates and Paul Allen in 1975 when MITS (Micro Instrumentation and Telemetry Systems) produced the first widely available personal computer in kit form, called the Altair 8800. This computer came with assembly language, making the computer difficult to use. Gates and Allen wrote a version of Beginners' All-purpose Symbolic Instruction Code (BASIC), the first computer language for personal computers, specifically for that machine and sold this software for the Altair. This version worked so well that it became the foundation of almost all personal computers at that time, including Apple products. With this modest start Microsoft paved the way for the development of two more languages, Microsoft FORTRAN (FORmula TRANslation) and Microsoft COBOL (COmmon Business Oriented Language), and sales of other successful software programs in the budding personal computer market.

The second generation of personal computing occurred when IBM entered the market in 1980. IBM asked Microsoft to develop operating system software, the computer's "nervous system," for its new personal computer based on an Intel microprocessor (the computer "brain"). Although Microsoft had focused almost exclusively on application software, it agreed to the deal, then bought the operating system from neighboring Seattle Computer Products and renamed it MS-DOS (for Microsoft Disk Operating System).

IBM's popular personal computer, produced with a microprocessor by Intel and utilizing MS-DOS, inspired the production of IBM clones. This in turn stimulated the creation of software and peripheral products throughout the computer industry. Microsoft and Intel products literally set the standard for the personal computer industry, thus ensuring a strong future for both companies.

Microsoft Word (introduced in 1983), Excel (1987), and PowerPoint (a product of Forethought, Inc., which was acquired in 1987 by Microsoft) were other successful applications. Combining these products into Microsoft Office, along with its operating systems, languages, business software, hardware, and computer how-to books helped Microsoft reach $140 million in sales and 900 employees on its tenth anniversary.

The CD-ROM (compact disc-read only memory), introduced in 1987, offered another opportunity for the company. Microsoft's Bookshelf, a collection of ten general-purpose applications, was the first CD-ROM for personal computers. In 1990, Microsoft became the first personal computer company to reach one billion dollars in sales in a single year.

Introducing Microsoft Windows

Computer speed and memory increased with the advent of internal hard drives in personal computers and expanded capacity of microprocessor chips.
This allowed the development of more complex software programs, such as Microsoft Windows.

Introduced in 1985, Windows did not arrive without cost and controversy. First, it functioned in a way so similar to Apple Computer's Macintosh operating system that Apple sued Microsoft for copyright infringement. Also, IBM considered Windows to be in direct competition with IBM's OS/2, a project IBM was developing with Microsoft. This led to the severing of the IBM-Microsoft partnership.

The early Microsoft Windows applications, up to version 3.1, were programs developed to operate in conjunction with MS-DOS. These programs were designed to make it possible for users to run multiple unrelated software applications at once. Windows evolved from software applications into a series of operating systems called Windows NT, Windows 95, Windows 98, Windows 2000, Windows ME, and Windows XP, which was introduced late in 2001.

Microsoft and Apple Computer, Inc.

In addition to its early partnership with IBM, Microsoft also had longstanding ties to Apple Computer, Inc. An early believer in Apple, Microsoft developed software applications (although not the Apple operating system) for the Apple II and later contributed significantly to software applications developed for the successful Macintosh line. In 1997, Microsoft helped bring a troubled Apple Computer, Inc. back into the market after agreeing to invest in Apple and develop Microsoft Office, Internet Explorer, and other applications specifically for Apple's Macintosh. As part of that deal, Apple agreed to drop the copyright infringement lawsuit that had been proceeding against Microsoft for many years.

Microsoft as a Monopoly?

The Windows operating system and Internet Explorer, Microsoft's World Wide Web browser, became so widely used that competitors claimed that Microsoft had become a monopoly. The Justice Department of the United States, along with the attorneys general of nineteen states and the District of Columbia, filed a lawsuit against Microsoft in 1998.

In April 2000, a court determined that Microsoft had violated the Sherman Antitrust Act . In his conclusions, U.S. District Judge Thomas Penfield Jackson found that "…Microsoft's share of the worldwide market for Intel-compatible PC operating systems currently exceeds ninety-five percent…" and that "Microsoft enjoyed monopoly power." He stated that Microsoft "used anticompetitive methods to achieve or maintain its position." In addition Microsoft was found to have attempted to monopolize the Internet browser market through anticompetitive acts, especially by its practice of integrating Internet Explorer with its Windows 95 operating system, thereby discouraging or prohibiting the use of other web browsers. Jackson ordered that Microsoft be split into two companies.

Although that remedy was reversed by the U.S. Court of Appeals in 2001, the appeals court agreed with both Jackson's monopoly ruling and his findings that Microsoft illegally maintained its monopoly. In October 2001,
Microsoft agreed to terms to settle the lawsuit out of court.

Microsoft

Dictionary of American History
COPYRIGHT 2003 The Gale Group Inc.

MICROSOFT

MICROSOFT. Founded in 1975, the Microsoft Corporation rose from having no assets to become one of the most valuable companies in the world, and in 2003 was the largest computer software company and one of the great success stories in American business.

The roots of the company go back to 1968, when the Lakeside Academy acquired access to a computer in downtown Seattle. Computer programming fired the imaginations of Bill Gates and Paul Allen, then thirteen and fifteen years old. At the time, access to computers was expensive. They took on local programming jobs to pay for more computer time. In 1971, they wrote a program called Traf-O-Data, analyzing patterns of traffic flow. This project earned them $20,000. The next opportunity to turn their skills into income was a major turning point. In 1974, Management Information Tools, Inc. (MITI), published an advertisement for the first mass-produced home computer, called the MITS Altair. The machine was primitive by today's standards. It took a soldering iron and hours of patience to assemble. Once assembled, it could only be programmed with the 1s and 0s of machine code, requiring the programmer to set toggle switches at the front of the machine.

Despite these limitations, Gates and Allen saw the potential of personal computing. But first, it had to be made practical for the non specialist. Their solution was to write a compact version of the BASIC language that could be loaded into the Altair's memory from tape. Once loaded, the program understood and responded to simple, quasi-English commands in BASIC, using a Teletype machine to communicate. To complete negotiations with MITI, Gates and Allen formed a partnership they called Micro Soft, for microcomputer software. They later dropped the hyphen. As other companies produced personal computers of their own, Gates persuaded them to use Microsoft's BASIC. Microsoft hired additional programmers as it produced other languages for the new machines.

Bill Gates attended Harvard while trying to run the fledgling company. He had planned to major in law. Shortly, however, he quit to focus on the company fulltime. While at Harvard, he met Steve Ballmer, a business major who would eventually join the company and later become its chief executive officer.

Microsoft's next triumphs came in the area of operating systems. An operating system is a resident program that enables a user to load, manage, and run other programs; it provides the computer's general look and feel.

In 1981, the International Business Machines Corporation (IBM) released its personal computer, or "PC." Microsoft grew tremendously after acquiring the MSDOS operating system and licensing it to IBM. (Gates paid a programmer named Tim Patterson $50,000 for the system, although Microsoft added refinements.) IBM did not insist on exclusive rights to the software. As a hardware company, it believed that more money was to be made selling machines. Microsoft was therefore able to license the system to all the IBM "clones" and so reap hundreds of millions of dollars. The de facto designer of the PC environment became Microsoft in conjunction with chipmaker Intel. The main competition remaining in the personal computer market was Apple—although Microsoft also wrote the most popular applications for the Apple Macintosh.

Along with Apple, Microsoft saw the value of graphical user interface (GUI), using pictures, menus, and icons, instead of typed-in commands. While continuing to expand into many areas, Microsoft worked for years on a GUI operating system for IBM PCs and clones (now just known as PCs). That system was Windows, released in 1985. At first a failure—clumsy and awkward compared to the Macintosh—Windows eventually succeeded. Windows 3.0 was easy to use and took advantage of improvements in PC hardware, such as superior graphics, that had occurred since Windows 1.0. Microsoft also released a new version of BASIC—Visual Basic—making it easy to write programs for Windows.

Eventually, 90 percent of all personal computers ran Windows, and the leading applications (including word processing, database, and spreadsheets) were also Microsoft products. In the mid-1990s, it seemed that the emerging Internet might give rivals a chance to supplant Microsoft, whose software had always been based on the single-user model. By the late 1990s, however, Microsoft's integration of Internet technology into its products helped secure its dominance. Meanwhile, the company continued to devote its large research budget to new areas, such as interactive television.

But on 7 June 2000, the confidence and persistence that had served Microsoft in the past threatened to damage it, as Judge Thomas Penfield Jackson ordered the breakup of the company in a suit brought by the U.S. Justice Department and a number of states. The suit charged that Microsoft had an operating-system monopoly in Windows, which it exploited to its advantage in other product lines. Jackson reasoned that if Microsoft was two companies, the applications division could not take advantage of close ties to the designers of Windows. In the summer of 2001, an appellate panel overturned this penalty as too severe (citing Jackson's bias, as revealed in published interviews) and sent the case back to a lower court for rehearing.

BIBLIOGRAPHY

Andrews, Paul. How the Web Was Won: Microsoft from Windows to the Web: The Inside Story of How Bill Gates and His Band of Internet Idealists Transformed a Software Empire. New York: Random House, 1999.

Ichbiah, Daniel, and Susan L. Knepper. The Making of Microsoft: How Bill Gates and His Team Created the World's Most Successful Software Company. New York: St. Martin's, 1991.

Manes, Stephen, and Paul Andrews. Gates: How Microsoft's Mogul Reinvented an Industry—and Made Himself the Richest Man in America. New York: Doubleday, 1993.

Microsoft Corporation

Gale Encyclopedia of U.S. Economic History
COPYRIGHT 2000 The Gale Group Inc.

MICROSOFT CORPORATION

Microsoft Corporation, the world's largest software developer, began in 1975 as a partnership between two young men, William H. Gates, 19, and Paul Allen, 21. Gates was a sophomore at Harvard University and Allen was employed by Honeywell when they saw a mockup of the Micro Instrumentation and Telemetry Systems (MITS) Altair, the first personal computer, pictured on the cover of Popular Electronics. They decided to write a BASIC Interpreter for the Altair and demonstrate it to MITS, which was located in Albuquerque, New Mexico. It was the first computer language program written for a personal computer.

In July 1975 Microsoft signed a contract with MITS that allowed the hardware company to use and market the BASIC software but Microsoft retained ownership of the computer language. It was a contractual relationship between a software developer and a hardware manufacturer that became a model for future software licensing agreements. Allen joined MITS as its director of software development.

By the end of 1976 Gates had dropped out of Harvard and had four programmers working for Microsoft in New Mexico. Allen left MITS in November and in March 1977 Allen and Gates formed an official partnership. Believing that microcomputers would grow in popularity, Gates set about convincing large corporations of the industry's future, licensing BASIC to Fortune 500 companies such as General Electric, NCR, and Citibank, among others. Microsoft licensed BASIC for the newly introduced Apple II, Radio Shack's Tandy computer, and the Commodore PET and TRS-80. It also began selling single copies of BASIC.

Microsoft then developed two other programming languages, FORTRAN (1977) and COBOL (1978), for the control program of microcomputer CP/M, which was one of several operating systems then available. Several hardware firms chose CP/M machines for their new computers and Microsoft became the leading distributor for microcomputer languages. In 1978 Microsoft had revenues of $1.4 million and 13 employees.

On January 1, 1979, Microsoft moved its offices to Bellevue, Washington (Allen and Gates were both Seattle natives), becoming the first microcomputer software company in the Northwest. Having recently established an international sales office in Japan called ASCII Microsoft, the company began working closely with NEC and other international computer manufacturers in the development of their products. By the end of the year Microsoft expanded its service to Europe. International sales would prove to be a significant source of revenue to the company over the years.

In 1980 the company had revenues of $7.5 million and 40 employees. Steve Ballmer, who had formerly worked with Proctor and Gamble, was hired as Gates's first assistant. He had the responsibility of establishing policies and procedures in the financial, organizational, and resource allocation areas. Meanwhile micro-computer technology was growing rapidly and with each new advance Microsoft was there to provide a computer language. It furnished versions of BASIC and FORTRAN for Intel's new 16-bit chip and developed a soft card for the Apple II, the top-selling microcomputer at the time, that enabled it to use CP/M and Microsoft BASIC. This was Microsoft's first hardware product.

In 1980 IBM decided to enter the microcomputer market, and it hired Microsoft to develop a computer
language and operating system for its machines, which were introduced to the public in 1981 as the IBM Personal Computer (PC). The operating system used for the IBM-PC was called MS-DOS, short for Disk Operating System. It would become an international industry standard, eventually replacing the CP/M operating system.

In 1981 Microsoft reorganized as a privately held corporation called Microsoft, Inc., with Gates as president and chairman and Allen as executive vice president. After recovering from a lengthy illness Allen would leave Microsoft in 1983. Meanwhile Steve Jobs and Apple had developed a revolutionary new micro-computer, the Macintosh. Microsoft became the first major company to develop products for the Macintosh when it was introduced to the public in 1984.

The microcomputer market began to explode in the early 1980s. The entry of IBM changed the image of microcomputers from that of a hobbyist's toy to a serious business machine. Microsoft's revenues jumped from $24.5 million in 1982 to $50.1 million in 1983 to $97.5 million in 1984, and the growth would continue in the coming years. In 1983 Microsoft introduced its first mouse, its first full-featured word processing program, Word, and Windows. Windows extended the features of MS-DOS by providing users with a graphical user interface (GUI). Although IBM would not adopt Windows for its interface, Gates convinced many manufacturers of IBM-compatible computers to adopt Windows. Retail versions of Windows became available two years later. During that year Gates met Jon Shirley, formerly with Tandy Corporation, and hired him to join Microsoft as president and chief operating officer.

Microsoft went public in 1986 after moving its headquarters to a new corporate campus in Redmond, Washington. With shares introduced at $21, the initial public offering raised $61 million. A year later, Microsoft shares were trading around $85, making Gates a billionaire at age 31. During 1987 Microsoft introduced several new products, including Windows 2.0, Microsoft Bookshelf on CD-ROM, the spreadsheet program Excel for Windows, and a new operating system jointly developed with IBM called MS OS/2. In 1988 Microsoft inched past rival Lotus Development Corporation to become the number one software vendor.

Microsoft's revenues surpassed the one-billion-dollar mark in 1990, with international sales accounting for more than half of that. The company had more than 5,600 employees. During that year Microsoft introduced Windows 3.0 with its largest marketing campaign in the company's history to date. Within a year Microsoft shipped four million copies to 24 countries in 12 languages. By 1993 there were more than 25 million registered users. Microsoft was also branching out into other areas of software, including desktop publishing and network servers, and the Federal Trade Commission (FTC) began investigating the company for possible anti-trust law violations.

In 1992 Microsoft created a three-person office of the president to replace Michael Hallman, who resigned as president after one year. The three members of the office were Mike Maples, head of the Worldwide Product Group; Steve Ballmer, head of Worldwide Sales and Support Group; and Frank Gaudette, head of Worldwide Operations Group. Gates was also recognized this year when he was awarded the National Medal of Technology for Technological Achievement by President George Bush (1989–1993).

Microsoft shipped several new products in 1993, including the network operating system Windows NT, MS-DOS 6.0, Microsoft Mouse 2.0, software for children, and Encarta, the first multimedia encyclopedia designed for a computer. In June the last copyright infringement claims made against Microsoft by Apple were dismissed, settling a lawsuit begun in 1988. Fortune magazine named Microsoft the "1993 Most Innovative Company Operating in the United States." Revenues for the year were $3.75 billion, and the company had more than 14,000 employees.

Microsoft celebrated the release of Windows 95 in August 1995 with several special events. More than one million copies were sold to retail customers in the first four days. Toward the end of the year Gates detailed Microsoft's commitment to supporting and enhancing the Internet by integrating it with the PC platform. In November the final version of the Microsoft web browser Internet Explorer 2.0 for Windows 95 was released and made widely available for downloading at no charge to licensed users of Windows 95. Revenues for 1995 were $5.9 billion, and the company had about 17,800 employees.

As the world embarked on the information super-highway in 1996 Microsoft was committed to providing a full range of tools for both Internet and intranet publishing. In January it acquired Vermeer Technologies, Inc., whose main product was FrontPage, a tool for creating and managing Web pages without programming. The company made several organizational changes during that year, creating an interactive media division to focus on interactive entertainment and information products and an executive committee to replace the office of the president. In July 1996 MSNBC, a 24-hour news and information cable network, debuted as the result of a joint venture between Microsoft and NBC News. MSN, the Microsoft Network, was reorganized to offer content on the World Wide Web.

During 1997 Microsoft strengthened its commitment to Internet services by acquiring WebTV Networks for $425 million in stock and cash and releasing Internet Explorer 4.0. WebTV allowed consumers to access the Internet through their television sets. During the year Microsoft also purchased 11.5 percent of the cable company Comcast Corporation for a cost of $1 billion. The company also announced an alliance with struggling Apple Computers and purchased a $150 million stake, giving Apple much-needed financial support. Microsoft's revenues for 1997 were $11.4 billion, and the company had more than 22,000 employees.

Microsoft again came under the scrutiny of the U.S. Department of Justice and in October 1997 the firm was charged with violating a 1994 consent decree. One of the key issues was Microsoft's bundling of its Internet Explorer with Windows, which competitors such as Netscape and Sun Microsystems considered anti-competitive and monopolistic. Informational hearings were held before a congressional committee, and the case went to trial in 1998.

In 1998 Microsoft acquired several Internet-related companies, including Hotmail, a free e-mail service that would become a component of MSN, and Firefly, an Internet start-up that had developed software to give users customized Web site views and protect their privacy. The company's long-awaited reorganization was announced in March 1999. The company was divided into five major groups to better reflect its core customers: 1) a new consumer and commerce group including MSN.com and Internet properties; 2) the business enterprise division; 3) the consumer Windows division; 4) a new business productivity group; and 5) a separate home and retail products division for consumer-targeted products such as games, input devices, and reference products. A new 14-member team to be led by Gates was formed to replace the smaller executive committee.

See also:Computer Industry, William Gates, Internet

FURTHER READING

Gates, Bill. Business and the Speed of Thought. New York: Warner Books, 1999.

——. The Road Ahead. New York: Viking Penguin, 1996.

Gross, Daniel. "William Gates and the Dominance of Microsoft." Forbes Greatest Business Stories of All Time. New York: John Wiley and Sons, 1996.

Microsoft

Microsoft The largest independent software producer in the world, founded by Paul Allen and Bill Gates in 1976. Microsoft produces a very wide range of software products ultimately based on its Windows operating system. Microsoft's business practices have often been criticised; this has led to successful legal action, in the United States and elsewhere, resulting in Microsoft agreeing to change its practices.

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